Charitable Remainder Trust (CRUT)

Submitted by russell twilley on Thu, 2017-06-15 14:40

As retired married couple, we have recently learned our business investment real estate has contract offer to purchase. This pending sale will result in significant capital gains. In addition monthly retirement income stream is now impacted with loss of cash flow unless a new investment is able to provide like income.

What are pros and cons of a CRUT especially with income tax deduction for charitable giving, possible tax credits to allow tax-free offset to roll over traditional IRA funds to ROTH IRA and the amount of annual percentage for distributions to provide income over life-time. I suspect CRUT funds will be in CRUT custodial account earning 2.5% to 5% annual returns.



Submitted by Brynn Hecht on Thu, 2017-09-07 23:05

Hello, The advantages of a CRUT is that it shields your investment from capital gains.  If your sale of the business is already happening then you may not be able to shield your gains. The business needs to already be inside of the CRUT.  Talk to a lawyer to see if this can be done retroactively.  There are a lot of other advantages to a CRUT.  

  1. Upfront Tax Deduction
  2. Gift Money to Charitable Causes
  3. Create an Income Stream for Retirement
  4. And of course the Capital Gains Tax avoidance

I also believe the funds inside of the CRUT can be self directed by yours truly.  So if you want to rebuild another real estate business, you could do that with the funds inside of the CRUT.  You might also look at replacing some of the money gifted to the CRUT with a life insurance policy.  That can be a popular strategy also.  

Submitted by Bruce Steiner on Fri, 2017-09-08 13:11

  • The charitable remainder trust has the effect of deferring (not avoiding) the capital gains tax.
  • You contribute an appreciated asset to the trust.  The trust provides for “income” to one or more individuals, with remainder to charity.  The “income” is either an annuity (a fixed percentage of the initial value of the trust) or a unitrust interest (a fixed percentage of the value of the trust, as revalued each year).
  • The payout rate has to be at least 5%.  The present value of the charity’s interest has to be at least 10% of the initial value of the trust.
  • As with any other trust, the trustees have to invest the trust assets in a reasonable way, taking into account all of the facts and circumstances.
  • You get an income tax deduction for the present value of the charity’s remainder interest.  However, that’s usually not very large, and in any event what drives the charitable remainder trust is the ability to defer the capital gain, not the income tax deduction.
  • Each year’s distribution is taxable, first as ordinary income to the extent of the trust’s current and accumulated ordinary income, and then as capital gain to the extent of the trust’s current and accumulated capital gain.  The effect is that you pick up the capital gain over time rather than all at once.
  • The charitable remainder trust is more attractive now that the capital gains rates are higher than they had been.  However, you have to weigh the benefit of the deferral against the loss of the remainder interest and the loss of flexibility.
  • Other possibilities are to do a Section 1031 exchange, to sell the property and pay the tax, or to keep the property and get a basis step-up at death.
  • Bruce Steiner, attorney

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